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Political Instability and Labor Market Institutions

  • Lucifora, Claudio

    ()

    (Università Cattolica del Sacro Cuore)

  • Moriconi, Simone

    ()

    (Università Cattolica del Sacro Cuore)

This paper investigates the relationship between political instability and labor market institutions. We develop a theoretical model in which some features of the political process, by reducing the future yields of policy interventions, induce an incumbent government to choose labor market institutions that create wage rents and divert resources from public good provision and social insurance. We test these predictions empirically using panel data for 21 OECD countries for the period 1985-2006. We find strong evidence that political turnover and political polarization – our measures of political instability – are associated with a more regulated labor market, lower unemployment benefit replacement rates, and a smaller tax wedge on labor. We show also that there are strong complementarities between different dimensions of political instability, and evaluate their impact on labour market institutions across countries.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 6457.

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Length: 51 pages
Date of creation: Mar 2012
Date of revision:
Publication status: published in: European Journal of Political Economy, 39, 2015, 201–221
Handle: RePEc:iza:izadps:dp6457
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  1. Aghion, Philippe & Algan, Yann & Cahuc, Pierre & Shleifer, Andrei, 2010. "Regulation and Distrust," Scholarly Articles 12490649, Harvard University Department of Economics.
  2. Botero, J. C. & Djankov, S. & Porta, R. L. & Lopez-de-Silanes, F. & Shleifer, Andrei, 2004. "The Regulation of Labor," Scholarly Articles 27867241, Harvard University Department of Economics.
  3. Enikolopov, Ruben & Zhuravskaya, Ekaterina, 2003. "Decentralization and Political Institutions," CEPR Discussion Papers 3857, C.E.P.R. Discussion Papers.
  4. Marina Azzimonti, 2011. "Barriers to Investment in Polarized Societies," American Economic Review, American Economic Association, vol. 101(5), pages 2182-2204, August.
  5. Nicoletti, Giuseppe & Ardagna, Silvia & Alesina, Alberto & Schiantarelli, Fabio, 2005. "Regulation and Investment," Scholarly Articles 2579825, Harvard University Department of Economics.
  6. Biroli, Pietro & Buti, Marco & Turrini, Alessandro Antonio & Van Den Noord, Paul, 2008. "Defying the 'Juncker Curse’: Can Reformist Governments Be Re-elected?," CEPR Discussion Papers 6875, C.E.P.R. Discussion Papers.
  7. Brügemann, Björn, 2006. "Does Employment Protection Create Its Own Political Support?," IZA Discussion Papers 2286, Institute for the Study of Labor (IZA).
  8. Alfonso Arpaia & Gilles Mourre, 2009. "Institutions and Performance in European Labour Markets: Taking a Fresh Look at Evidence," Working Papers CEB 09-049.RS, ULB -- Universite Libre de Bruxelles.
  9. Alberto Alesina & Sule Ozler & Nouriel Roubini & Phillip Swagel, 1992. "Political Instability and Economic Growth," NBER Working Papers 4173, National Bureau of Economic Research, Inc.
  10. Andrea Bassanini & Romain Duval, 2009. "Unemployment, institutions, and reform complementarities: re-assessing the aggregate evidence for OECD countries," Oxford Review of Economic Policy, Oxford University Press, vol. 25(1), pages 40-59, Spring.
  11. Aghion, Philippe & Alesina, Alberto F & Trebbi, Francesco, 2002. "Endogenous Political Institutions," CEPR Discussion Papers 3473, C.E.P.R. Discussion Papers.
  12. Alberto Alesina & Silvia Ardagna & Francesco Trebbi, 2006. "Who adjusts and when? On the political economy of reforms," Harvard Institute of Economic Research Working Papers 2108, Harvard - Institute of Economic Research.
  13. Vincent Anesi & Philippe De Donder, 2009. "Party Formation and Minority Ideological Positions," Economic Journal, Royal Economic Society, vol. 119(540), pages 1303-1323, October.
  14. Pushan Dutt & Devashish Mitra, 2008. "Inequality and the Instability of Polity and Policy," Economic Journal, Royal Economic Society, vol. 118(531), pages 1285-1314, 08.
  15. Jens Høj & Vincenzo Galasso & Giuseppe Nicoletti & Thai-Thanh Dang, 2006. "The Political Economy of Structural Reform: Empirical Evidence from OECD Countries," OECD Economics Department Working Papers 501, OECD Publishing.
  16. Fabrizio Carmignani, 2003. "Political Instability, Uncertainty and Economics," Journal of Economic Surveys, Wiley Blackwell, vol. 17(1), pages 1-54, February.
  17. Grofman, Bernard & Van Roozendaal, Peter, 1997. "Modelling Cabinet Durability and Termination," British Journal of Political Science, Cambridge University Press, vol. 27(03), pages 419-451, July.
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